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How IT Providers are Shaping the Cloud – While the Cloud Shapes Them

By September 25, 2011Article

Interest in cloud computing has been spurred by a confluence  of changes in the business and information technology landscape. Today, it is generally viewed as a potentially attractive new form of low cost IT outsourcing, and cloud technology providers and users are focused on tackling the many limitations and challenges of cloud computing, especially in serving enterprise scale needs. Looking ahead, though, we see a series of significant disruptions that will be catalyzed by the evolution of cloud computing.

These disruptions will become progressively more widespread and profound, creating opportunities not only to re-shape the technology industry but all institutional architectures and management practices in an expanding array of other industries. Providers of cloud computing that can provide a compelling shaping view to mobilize other participants will have the potential to carve out a leadership position and reap significant rewards by leveraging their own efforts through the initiatives of many others.

Cloud computing is a model for delivering on-demand, self-service computing resources with ubiquitous network access, location-independent resource pooling, rapid elasticity, and a pay-per-use business model. Rapid experimentation by early cloud providers has created four distinct layers of services:

  • Infrastructure as a Service (SaaS) – provides raw utilities such as compute power and electronic storage resources, as services over the network
  • Platform as a Service (PaaS) – includes tools and environments to build and operate cloud applications and services
  • Software as a Service (SaaS) – enables on-demand use of software over the Internet and private networks
  • Business as a Service (BaaS) – includes application functionality coupled with physical and human resources required to perform a broader set of business activities – typically a major module of activity in a broader business process (e.g., a call center module, as part of the customer service process), or in some cases the complete business process itself (e.g., fully cloud-based supply chain management)

Growing business pressures create the imperative for ever-increasing efficiency, it is no surprise that most current discussions tend to view cloud computing simply as a new, lower cost form of IT outsourcing due to factors such economies of scale, virtualization, utility computing, and faster software deployment and upgrades through SaaS. However, while these trends create economics that are very attractive to select companies, especially with growing economic pressures, they are less compelling to firms that have already made significant investments in premise-based infrastructure.

As such, cloud providers are focused on white spaces not currently served well by premise-based solutions. This will lead to significant new technology  innovation that will, over time, lead to the emergence of new IT architectures.  These new architectures will enable the cloud to become more enterprise-ready and will compel core IT to move more of the traditional premise-based  infrastructure into the cloud.

The adoption of cloud computing will be shaped by a continual iteration of rapidly evolving cloud computing capabilities in areas where existing premise-based infrastructure is not yet able to serve business needs. We see the evolution of cloud computing generating four levels of expanding disruption, driven by a complex interplay of segments of customers with unmet business needs, evolving cloud computing capabilities and new sets of providers emerging to deliver these capabilities to users. The four disruptions catalyzed by cloud include:

  1. Growth of new technology delivery models
  2. Evolution of a new IT architecture to address unmet needs of business ecosystems
  3. Rapid adoption leading to the restructuring of the IT industry
  4. Disruption of other industries beyond high technology based on these new capabilities

First level of disruption: new delivery models

This first disruption is already occurring on the edges of the core IT industry and builds on the unmet needs of high-growth businesses with innovative new delivery models. Since the early-stage companies driving the bulk of early adoption have relatively basic needs, the inability of cloud computing services to replicate sophisticated requirements in areas like security and SLA enforcement has been less of an obstacle to adoption. Nevertheless, the early adopters at the edge of existing enterprises and the high-growth enterprises have started to put pressure on cloud providers to enhance their enterprise-level capabilities.

Cloud shapers in the first level of disruption. New cloud provider entrants such as Amazon and Google came in from adjacent markets to leverage their deep expertise in managing large and low-cost data centers and achieve even greater scale in their core businesses. Other cloud players include SaaS providers operating their own infrastructures to deliver the applications as a service (e.g.,, Intuit and Microsoft).

Collectively, these cloud providers are driving the first wave of disruption in the IT industry, focusing on new delivery models including pricing, channels and customer sets. The shift in revenue model for incumbents entails moving from the current economic model characterized by large up-front payments followed by significant ongoing upgrade and support revenues, to one characterized by smaller regular payments based on use.

This shift has implications on many areas of the cloud provider organizations  including the sales and marketing as the value proposition of the offering changes, and the support organization that will have to manage upgrades, changes by customers, etc. Hardware vendors will continue to see a shift in their customer base as more infrastructure is sourced via large IaaS providers that will have more buying power and volume than individual companies.

This first wave of cloud computing adoption is also disrupting traditional channel partnerships as cloud computing makes it easier to reach end users directly and drives the emergence of new channels more specialized in aggregating cloud services for customers.

This first level of disruption, however, has been relatively modest at the outset because of relatively limited adoption of cloud computing options and the need to operate at the edge of existing enterprise infrastructures.

Second level of disruption: technology disruption

The second disruption is characterized by the evolution of IT architecture that cloud computing will enable, with the purpose of meeting the needs of a specific and growing a set of potential customers – orchestrators that coordinate activity related to end-to-end extended business processes across a large and diverse network of partners.

Companies in a variety of demanding global industries such as consumer electronics, motorcycles and apparel are increasingly adopting an “orchestrator” role – building ever-expanding networks of highly specialized players to deliver customer value. Their needs are not met by premise-based architectures, so they use manual processes to orchestrate their complex ecosystems.

In contrast, leading western firms take the opposite approach: they limit the number of business partners they work with in extended business processes involving supply management, product innovation and distribution channel management in order to reduce complexity, trim costs and extract efficiencies. At least until today, their premise-based systems have enabled them to meet customer needs; but as nimbler orchestrators with new cloud-based architectures emerge, the existing premise-based solutions will quickly demonstrate their lack of flexibility and ability to facilitate learning in order to deliver rapid, customer-centric innovation.

In general, orchestrators of complex ecosystems need to coordinate long-lived loosely coupled synchronous transactions effectively among large numbers of specialized providers. These companies have significant unmet needs and are  pioneering management practices to coordinate large and expanding networks but with very limited technology platforms (e.g., phone, fax). The need for orchestration is growing rapidly as intensifying competition increases the value of large-scale diverse networks in providing flexible, high-performance services on a global scale to diverse industries and markets. These emerging “process networks” will enable rapid and reliable innovation through distribution of value-added processes.

To address these orchestration challenges, a new set of architectural components needs to be developed. The design, implementation and federation of these architectural innovations lend themselves to cloud-based solutions far more readily than to the current premise-based IT infrastructures, due to the inherent “shared services” nature of the cloud.

Cloud shapers in the second level of disruption. The new generation of cloud providers will likely be vertically integrated across infrastructure and cloud management. They will start with a few core applications but will increasingly accommodate third-party applications delivered as services. They will actively orchestrate interactions rather than simply aggregating applications (like

These companies will include tech-savvy orchestrators that have custom developed very sophisticated new IT platforms to coordinate their large and expanding networks. They will provide proof points and early reference models that will inspire a new generation of tech entrepreneurs to design and provide new cloud-based architectures to serve themselves and the wave 2 target customers.

Already, there are real companies that have made significant progress in implementing these new architectures. Although these companies started in specific markets like travel and trade financing, they are building a critical mass of participants and are becoming the first wave of cloud providers driving the new architectural innovations.

Third Level of Disruption: Restructuring of the IT Industry

The third disruption will be driven by rapid adoption of cloud computing services and the resulting pressures placed on providers to deliver best-in-class service at each layer of the stack.

Having built significant positions at the edge of existing large-scale enterprises, cloud computing providers will now be in a better position to develop the full range of capabilities required to serve the core needs of large-scale enterprises. As such, for the first time, the key adopters of cloud computing will be traditional enterprises that finally see a compelling value proposition to move away from premise-based infrastructure.

The key elements of the value proposition will include compelling economic benefits of cloud computing (particularly the scalability, ability for low-cost upgrades and energy efficiency), significant differentiation in terms of functionality not available from premise-based datacenters or private clouds, increasing to match and surpass traditional premise-based platforms in terms of security and reliability.

Cloud shapers in the third level of disruption. Cloud providers will begin to more tightly focus on specific layers of the cloud computing stack and, in key layers, develop “service grids,” whose purpose is to aggregate atomic services and deliver them to users within guaranteed performance parameters. These service grids will utilize federation frameworks that enable providers to integrate third-party services, allowing grid providers to free up resources to fund growth rather than having to develop atomic services themselves.

The existing industry verticals in IaaS and SaaS will restructure into five distinct layers/arenas of cloud computing that are likely to be driven by focused and specialized players:

  1. IaaS providers will focus on building and operating large-scale data centers providing sophisticated infrastructure management services to optimize utilization of capital-intensive computing, storage and network facilities.
  2. Enabling platform as a service (ePaaS) providers will focus on managing service grids that source and aggregate enabling services like security, performance management and data translation. In the ePaaS layer, the services aggregated by the service grid will be largely transparent to end users but critical to the application developers building application services at the next layer. These service grids may be provided by specialized independent businesses or by large user enterprises that offer their enabling services to other enterprises. The service grids will be targeted by domain of expertise (e.g., application security services or SOX compliance services for financial  institutions).
  3. Specialized SaaS providers of enabling and application services that will leverage ePaaS platforms described above. These providers will also include a growing number of “user” enterprises that discover the benefits of “exposing” key elements of their business operations as services to be consumed by other enterprises.
  4. Application platform as a service (aPaaS) providers will focus on managing service grids that source and aggregate application services. These players will specialize in particular application domains, whether defined horizontally (e.g., human resource management, customer relationship management), or defined vertically (e.g., financial services, health care). Their focus will be on providing aggregation platforms for a vast array of more specialized application service providers, offering specialized services like SLA management and service directories, enhanced by deep domain expertise to help users configure the appropriate bundles of application services.A critical role of these aPaaS providers will be to enable cloud users to create new coarse-grained business services, composed of granular services available through the aPaaS platform. For example, a financial services aPaaS might enable a financial institution to construct a new loan product by aggregating atomic services such as identity verification, credit history checking, credit risk modeling, etc. As a result, through the aPaaS, the financial institution is able to easily construct a new innovative coarse-grained product by piecing together several best-in-class atomic services which it would otherwise need to create or source through in-house resources.
  5. BaaS providers will be organizations that integrate application functionality with physical and human resources required to perform a broader set of business activities – typically a major module of activity in a broader business process or in some cases the complete business process itself. An early example of a BaaS provider is Amazon’s logistics offering, which includes a platform plus physical warehouse and distribution facilities. Another is LiveOps’ managed call center services, which includes a software platform along with call center operators).

In addition to these five layers, specialized professional service firms will also play crucial roles in cloud adoption and usage, by organizing around specific domains to help end users determine how to most effectively leverage the services of cloud computing providers in their business operations.

They also will help client organizations to adopt the right mix of services and applications. This could lead to a significant and perhaps disruptive shift from focus on technology design and integration to deep understanding of business context and economic drivers to help clients get maximum value from these platforms.

Control points

The integrative layers of the evolving cloud computing industry (i.e., the IaaS, ePaaS, and aPaaS) dis-intermediate and commoditize the layers below them. Thus, these layers will become the key “control points” for the industry. These are the lucrative roles that cloud computing leaders will dominate.

The two lower levels, IaaS and ePaaS, will serve as the control points for the IT providers, while aPaaS will be a control point for leading players in several diverse industries and functions.

In contrast to these concentrated control points, the SaaS layer is likely to see a high degree of fragmentation as more specialized players find ways to leverage the resources of the ePaaS and IaaS layers below it.

Finally, the BaaS layer may or may not become fragmented within particular domains, depending on economies of scale and scope in the broader business activities. For example, fulfillment is likely to become very concentrated due to the network effects and the importance of economies of scale in that business.

As this re-shaping of the cloud computing industry evolves, it is likely to put greater and greater pressure on existing leaders of the IT industry. A broader array of enterprise level IT infrastructure and applications will become addressable through this more-specialized and scale-driven cloud computing industry and traditional premise-based IT solutions will retreat to narrower niches. As a result, existing leaders of the IT industry will need to find ways to carve out leading roles in the key control points or risk being pushed into narrower and narrower niche roles in other layers of the cloud computing industry or in a shrinking “pre-cloud” arena.

New players in the IT industry, either existing scale companies from adjacent arenas like e-commerce and search or completely new entrants riding the cloud computing disruption, will emerge as leaders in the IT industry, displacing many of the traditional leaders.

As a result of these disruptive developments, the IT industry is likely to be significantly transformed, both in terms of c0ncentration / fragmentation trends and in terms of the identities of the leaders of the industry.

The shaping opportunity

This expanding potential for disruption suggests a significant shaping opportunity in the IT provider landscape, driven by a compelling shaping view of the emerging cloud computing arena and its potential impact on a growing array of industries. We believe that cloud computing will be far more disruptive than most people anticipate.

We suggest the following as one plausible Shaping View: “Cloud computing will significantly accelerate the movement toward scalable business ecosystems focused on talent development … by serving as a catalyst for fundamentally different IT architectures.”

Given this view, a player in the ePaaS layer, one of the primary control points for the IT industry, will likely be in the best position in the cloud stack to create a shaping strategy and platform. A player in the ePaaS layer is naturally positioned to create a platform that reduces the investment required by other services providers; creates protocols around interoperability between services; provides opportunity for a near-infinite number of services to sit on the platform, and can continue innovating on the platform to increase ease of introduction of new services, thus attract an increasing number of customers whose unmet needs can be addressed.

Providers that want to be shapers can consider a number of early moves that they might take to improve their likelihood of success. One likely play is to target the unmet needs of actual or aspiring orchestrators of specific business ecosystems as identified in the second disruption wave. A shaper can develop a minimal PaaS to address these unmet needs, riding upon someone else’s IaaS and then aggressively recruit enabling SaaS (e.g., security, transport) and application SaaS and create ways for these third parties to connect with clients and other services. Over time, a would-be cloud shaper can carve out a leadership position in the ePaaS layer of the evolving cloud computing industry.

John Hagel is Co-chairman and John Seeley Brown is Independent Co-chairman for the Deloitte Center for the Edge.

The Deloitte Center for the Edge conducts original research and develops substantive points of view for new corporate growth. The Center’s mission is to identify and explore emerging opportunities related to big shifts that aren’t yet on the senior management agenda, but ought to be. While Center leaders are focused on long-term trends and opportunities, they are equally focused on implications for near-term action, the day-to-day environment of executives. For more information about the Center’s unique perspective on these challenges,

About Deloitte: Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

This article is an excerpt of “Cloud Computing: Storms on the Horizon,” a Deloitte white paper, and is republished here with permission.

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